Supreme Court of Canada Clarifies Application of Arbitration Clauses in Insolvency

In the recent case of Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (Peace River), the Supreme Court of Canada (the SCC) clarified the circumstances in which an otherwise valid arbitration agreement may be held to be inoperative in the context of a court-ordered receivership under the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the BIA).

BACKGROUND

The Peace River case arose after Peace River Hydro Partners (Peace River) subcontracted certain work to Petrowest Corporation (Petrowest) and its affiliates in connection with Peace River’s construction of a hydroelectric dam in northeastern British Columbia. The parties’ agreements included several clauses providing that disputes arising from their relationship were to be resolved through arbitration (the Arbitration Agreements).
 
Petrowest subsequently became insolvent and a receiver (the Receiver) was appointed over its business pursuant to the BIA. The Receiver commenced a civil action against Peace River in the Supreme Court of British Columbia (the Court Action) with respect to funds alleged to be owed to Petrowest by Peace River. Peace River applied to stay the Court Action on the basis that the Arbitration Agreements governed the dispute and it therefore should be submitted to arbitration. 
 
Where a party to an arbitration agreement commences legal proceedings in court against another party to the agreement in respect of matters governed by the arbitration agreement, British Columbia’s domestic arbitration legislation (the Arbitration Act), and similar arbitration legislation throughout Canada, permits the party seeking to enforce the arbitration clause to apply to stay the court proceeding in favour of arbitration. In such circumstances, the Arbitration Act mandates a stay of the court proceeding unless the arbitration agreement is “void, inoperative or incapable of being performed”.

APPLICATION OF THE ARBITRATION ACT IN A RECEIVERSHIP CONTEXT

Based on the facts at play in Peace River, the SCC determined that the Court Action should be permitted to proceed on the basis that the Arbitration Agreements were inoperative. In coming to this conclusion, the SCC held that the Arbitration Act does not require a court to stay a civil claim brought by a court-appointed receiver in every case that the claim is subject to a valid arbitration agreement.
 
The SCC observed that the BIA grants the court a broad power to determine that an arbitration agreement is “inoperative” in the face of parallel insolvency proceedings. In particular, a court may find an arbitration agreement to be inoperative in the insolvency context where a centralized judicial process is necessary and the party seeking to avoid the arbitration can establish that submitting the dispute to arbitration would compromise the orderly and efficient conduct of a court-ordered receivership.
 
The SCC cautioned that courts must be careful when considering whether to refuse to stay a court proceeding in favour of arbitration. Even where one party is insolvent, courts should be mindful of the parties’ agreement to arbitrate and adopt a deferential approach that accords with the purposes of the Arbitration Act. Those purposes will typically be served by holding parties to their arbitration agreements and narrowly interpreting the word “inoperative”.  
 
Determining whether an arbitration agreement is inoperative is a highly factual exercise guided by a number of relevant factors, which may include:

• the effect of arbitration on the integrity of the insolvency proceedings, which are intended to minimize economic prejudice to creditors;

• the relative prejudice to the parties to the arbitration agreement and the debtor’s stakeholders;

• the urgency of resolving the dispute;

• the effect of a stay of proceedings arising from the bankruptcy or insolvency proceedings, if applicable; and

• any other factors the court considers material in the circumstances.

The SCC acknowledged that arbitration and insolvency law have long been understood as embodying opposing interests. The “single proceeding model” of insolvency proceedings favours the enforcement of stakeholder rights through a centralized judicial process, whereas arbitrations are a decentralized process with limited court intervention. However, the SCC noted similarities between these two areas of the law, including that arbitration and insolvency proceedings both favour efficiency and expediency, offer procedural flexibility, and often rely on specialized decision makers to achieve their respective objectives. 
 
Based on the unique circumstances in Peace River, the SCC found that the complex arbitral process contemplated by the Arbitration Agreements – which contemplated multiple overlapping arbitral proceedings – would compromise the Receiver’s ability to maximize recovery for Petrowest’s creditors. Therefore, expediency and efficiency concerns militated in favour of finding the Arbitration Agreements to be inoperative under the Arbitration Act.

KEY TAKEAWAYS

The SCC’s decision in Peace River is a strong statement as to the broad jurisdiction granted to courts in an insolvency proceeding to take steps deemed necessary to meet the objectives of insolvency legislation, which favour a “single control” model where disputes can be resolved efficiently and value for creditors can be maximized. However, arbitration legislation varies across provinces. Court-appointed receivers (or similarly situated insolvency professionals) seeking to avoid the application of arbitration agreements should seek advice that considers the facts and arbitration legislation specific to each case.
 
Finally, as noted by the SCC, court-appointed receivers should consider seeking directions in the supervising court before commencing court proceedings in connection with a dispute that is subject to an arbitration agreement governed by the Arbitration Act. However, when a receiver initiates court proceedings without prior judicial approval, the court must determine whether to exercise its legislative jurisdiction under the BIA to decline to enforce the arbitration agreement under the Arbitration Act.
 
For more information, please contact:
 
Ariel Solose                 +1-604-631-4608
Claire Hildebrand       +1-604-631-3331
Alison Burns                +1-604-631-3331
 
or any other member of our Litigation & Dispute Resolution group.